Hello, and welcome to What Goes Up, a weekly markets podcast. My name is Mike Reagan. I'm a senior editor at Bloomberg and.
I'm Aldana Hire, a cross asset reporter with Bloomberg.
And this week on the show, Well, the recent failure of some regional banks has turned investors' attention to the health of the credit markets and the possibility of a so called credit crunch in which the availability of debt financing becomes drastically reduced. So what kind of shape are credit markets in right now and what can we expect for the rest of the year. We'll get into it with a veteran portfolio manager in the fixed income markets.
But first though, Donna, I have to ask, have you done all your Mother's Day shopping?
I haven't bought anything for anybody?
Nothing for not anybody mom.
Not for my mom, not for my my husband's mom, not for his grandma.
Nothing, nothing. A terrible daughter.
I'll just buy flowers on the day off. I guess, okay, But we are flying to Florida to see my husband's grandma. She's ninety nine. Ohs, she's turning one hundred in August.
Oh my god.
So that's the gift. Really, you know, Okay, have you done your shopping?
I've got a reservation for my wife.
That sounds nice that you're making me feel bad. You're making me feel a little bad.
Of course I waited till last week and there's no reservations left, so I have a three thirty.
No, you don't the worst time. It's like not brunch, but also not dinner.
What is it? I don't know what it is.
You're lucky. The restaurant is even I'm.
Trying to convince her. It's the new hip thing. Yeah, everyone's brunching it.
It's early early bird, yeah, early the earliest, but late.
It's a late night brunch.
Nice. Nice, that's perfect. Anyway, our guest is waiting for us. I do want to bring her, and I'm so excited to have her on. I've heard her speak so many times. I'm so happy she could join us for the podcast. It's Elaine Stokes, executive vice president and portfolio manager and co head of the Full Discretion team at Loomis Sales. Elaine, thank you so much for coming on the podcast.
Thanks for having me.
Like I mentioned, I've been to a bunch of you guys's events I've heard you over the last couple of years talk about your many different outlooks, but maybe we can just start with you just giving us a quick overview of who you are and what your role entails.
Okay, well, I am obviously you mentioned my name, Elaine Stokes.
I've been working at Loomis for thirty five years this week. I am part of what we call the full Discretion Team. What we manage is multisector portfolios. We take a long term opportunistic approach, so active management, which.
Has been a little out of othe as of late.
But I think something that people are are, you know, eyes open to again now that we're starting to see some value in the market.
You know, Elaine, I know you keep close eye on credit markets in your role, and there's been so much talk lately after the failure of these regional banks about a potential quote unquote credit crunch. So far, I'm not seeing a lot of like hard data evidence of it. If you look at say, high yield spreads, they seem pretty well contained. I know that FED Senior Loan Officer survey showed a little bit of an increase in tightening
of standards, but nothing sort of through the roof. They're obviously are pockets of weakness commercial real estate, mortgage backed securities. Those spreads are getting pretty wide. But I'm curious how you're thinking about sort of the macro conditions for credit right now. Is that a real risk of a credit crunch where supply of credit gets greatly curtailed because of all these issues that we've seen in the banks.
It seems to us that what has happened and what we've really seen out of this banking turmoil, i'll.
Call it, is that we have seen.
A proof point that all these moves by the FED are finally working.
But they're working in.
People's risk appetite going down for things like new technology, crypto, even some private equity. But we're not seeing it in our day to day life right We're not seeing it to the extent that you would expect to be seeing it in normal day to day borrowing. What my fear is is that if we continue to have equity markets telling us that regional banks aren't safe, then regional banks and banks in general will then continue to tighten and continue to tighten.
Their standards, and that's going to start to hit those small and medium sized businesses. If that happens.
I think we all have a different view of what the recession will look like. Being the week prior to Mother's Day, and Regulate is liking to come out and give us something on Sundays.
I was thinking that maybe.
That would be the regulator's gift to us, is that they gave us something that would quiet down this. You know, constant, let's take a run at the regional banks and then settle down. Take a run at the regional banks and settle down, and would get something that would would put that potential crisis of confidence that we're all looking at and kind of put it to bed once and for all.
We have strong.
Banks, and it's a confidence game, and we need to do something to swelch that confidence or it is going to start to affect the economy.
So you said in your notes, obviously a lot rides on a resolution to the banking issues. How plausible is it to actually see something like the universal Deposit insurance or how do you actually see things playing out going forward?
You know, I really think a lot of it rides on watching what happens to the equities of these regional banks, because that's the only place we're still you know, keeping our eye on and watching where that fear is coming. If we can get to a steady state, maybe we're going to have an orderly merger or two beyond what
we've already had, then I think we're past it. But if we I think the next two weeks are critical, and having the negotiations in Washington kind of hanging over our head at the same time definitely has the ability to make markets.
Overreact, you know, And obviously it all comes back to interest rates and the path for the Fed this year. Elaine. We did get CPI data this week, headline number four point nine percent, that about one tenth from the previous month. Core at five point five percent, also down about a tenth, but really not aggressively normalizing the way it did, say last summer. What's your big picture view on where the
Fed and rates markets are headed in general? Given this inflation scenario that the worst it seems to be over, but we really kind of seem to be plateauing almost at some pretty elevated levels. What do you expect for the rest of the year as far as rates and the Fed?
Yeah, so, because of the short term reasons we already mentioned, right, what's what's happening with the regional banks and the debt sailing talks. I think the FED will absolutely pause at its next meeting.
But longer term.
Our view is that there are some big picture secular trends that are going to keep inflation elevated, not necessarily elevated at five percent, you know, but I think it's going to be really really hard to get to target. You know, we believe that the FED is going to be a little slower to react in cutting rates.
We think the market's a little bit ahead of itself here.
The market, I think is pricing in, you know, one of those first two short term items going horribly wrong and the FED having to come in and really cut. We think that, you know, this is what we refer to as the four d's. Right, we have demographics we're working against us. We have deglobalization working against us. We have decarbonization working against us.
In growing deficits.
Right, we have those four things that we all you know, are familiar with that are all potentially inflationary, and it's going to be hard for the FED to kind of take.
The foot off the pedal completely.
It just doesn't feel like a strong cutting cycle is in our future.
Can we talk about what the market is expecting, because the market is pricing in cuts, you know, as early as July, which is like in a couple of weeks basically, so like what is behind that thinking there? And then almost everybody I talked to is like, that is not going to happen. The Fed is not going to be cutting in July.
The only way that really makes sense to me is that the market is saying in putting pressure on the government to get its act together and come to an agreement or to figure out how to make this bank situation go away.
Right.
I feel I got some market saying, hey, we're here telling you to get your act together, because it doesn't make sense given the economic numbers that we're seeing. You know, we're still seeing some up, some down, you know, a very mixed bag of economic numbers, and still have too many good potentials wrong drivers of this economy.
So that just does not make sense.
And I just think it's the market using whatever lever it has to get the attention of the regulators to force the fence hand.
I guess yeah, you know, Elaine, it's kind of a fascinating time to be surveying the fixed income landscape because there's some tremendous opportunities in the front end. You know, even in a money market phone you can get five percent basically yield right now. So I'm curious, what where are you seeing value? You know, is is the front end the place to be right now with these high yields or is it you know, what are you looking at is terms as attractive corners of fixed income right now?
What I love about fixed income is is you kind of have to triangulate. Right, it's great. We have over five percent in the short end, you know, up from under two percent, and for the last several years, any of us would look at five percent as wow, that's that's an healthy return.
Let's not forget that inflation is still around five percent.
If you take more risk, get involved in in high yield we're talking about eight and a half to nine percent type of yields, so that's really attractive. So the yield levels has gotten really interesting. Spreads have also gotten much larger than they were a year ago. Right we're pretty much almost doubled in spread levels that we're getting from our tights, So that means that we're we're getting
paid a bigger premium to take on some risk. Is it enough that it looks like we're getting paid as if we're in a downturn or a recession.
Not quite.
But the difference right now is that the dollar price is lower. We have been living in a market where dollar prices for bonds have been well over par for very long time, and now we're looking at dollar prices that index averages are close to ninety cents on the dollar. So not only can you buy that bond at the five percent or the eight and a half percent, but you also have the potential to go up those ten price points if there's any type of positive economic news
or specific news. So when I look at all three together and really think about the technicals in the market, and when I talk about the technicals in the market, what I'm really referring to is the lack of issuance. We've had very very low issuance levels over the last few years. Borrowers have gone private and that has made a big difference in the markets in the number of
buyers out there looking for product. So when I consider all that together, I think that there's value in this market, and it's in the short and yes, but we also can go down the risk spectrum a little bit and pick up some nice, low dollar priced bonds that have the potential to go up in a lot of xcess yield.
Elaine, we had this very interesting interview with Bill Gross earlier this week where he said that he really likes one month tea bills because he thinks the debt ceiling issue, although it's a risk that it will get resolved. And so I'm curious, like if somebody came to you, if a client came to you and you know, asked you about tea bills, what would you advise them? And this is my sort of runabout way of asking you how you're managing and thinking about the debt ceiling issue.
I look at it as a bump in the road. We've seen this movie before. Yes, it feels a little bit worse. I was just noting that, you know, credit DeVault swaps and US credit devult swaps are now wider.
Than Greece, Brazil, Mexico.
Like I could go on and on, right, but when all is said and done, everybody in that room knows they have to come up with some type of agreement. The alternative is too bad politically for both sides. Do I think it makes sense to be super short. Yes, there is value there. But what I would say is, let's take advantage of the volatility. The volatility that I think we're going to have over the next couple weeks
is going to be the opportunity. So take advantage of that opportunity to buy a little further out the curve, to buy low dollar price bonds, to build in real return for a long time.
Why stay. Maybe I'm too much of a risk taker.
I was brought up in the high yield market, but these are the periods going into the downturn that you build your long term portfolios. So that's what I would use this opportunity for.
So you do think high yield is worth the risk if we do get some volatility, even with all the recession concerns floating around.
Yes, I don't believe that this time around it's going to be the traditional high yield market that's going to see the big wave in defaults. That is going to happen in either the bank loan market or the private market, and then we might not even see them as defaults because a lot gets worked out behind the scenes there.
But that's where the weaker.
Issuance has come and you know, the lower quality issuance. So the traditional high yield market is actually setting up to look pretty attractive, you know, Eleaene.
I wanted to rewind a little bit because you mentioned something that I had intended to ask you about, and that is the shift into private credit that we've seen. I mean, I don't know how many stories I've seen about you know, borrowers tapping into the private credit markets more and more. I don't think we quite have the visibility into it and the transparency to put dollar figures on how big of a shift it's been. But clearly there's been a big shift into private credit. I'm curious
what you think is driving that. I mean, is it simply a matter of less paperwork, less need for disclosure, that sort of thing, or is there more to within that.
I think there's a lot of things that have been driving that.
Part of it was, and I do want to tell you that kind of that straight line up has started.
To roll over.
Okay, so a little bit less year to date has been going into the private markets versus the public markets were starting to shift. Rates were so low, so much money was looking for something better to do a place where they could get higher returns, so they were going to the private market.
That cash was going to the private markets. So now the private markets.
Were flushed with all this cash and what are we going to do with it? And they started putting together and what we call them club deals. They started to join forces, friends getting together, and they would puck deals right out of the public market, print them a little bit about the same level or even a little bit tighter than they would have happened in the public market.
But for the issuer, they took away that market risk, you know, that process of having to bring it out into the market as an issuer.
Oh it's you know, it's five buyers.
This is going to be much easier to negotiate if we do get ourselves into trouble. And a lot of this debt that came there was single B and below, you know, so it was definitely riskier type of debt. It kind of set itself up on both sides to
be advantageous. Now with money being pulled back from taking on that excess risk and short rates at five percent, do we really need to go into that type of risk, So money is pulling away from it, and those same deals that come into the market, and whether they're private credit or bank loans, we're seeing them come to the market and looking to come back to the high yield market. So we're starting to go full circle on this whole swing.
The bottom line is, I think this is one of the most fascinating parts of the debt markets right now. These markets are converging. It's getting harder and harder to tell the difference between the high yield market, the bank loan market, and the private debt market, and the players are a lot of the same players.
The syndicate desks.
Are you know, for new issues, are all talking to each other, and you know, almost any given deal, you could find a way to put it into the market that you want it to be in if you're a large enough buyer. So it's really become an interesting part of the market and we're watching it really really closely as potent she'll.
Supply coming back into the debt markets.
Elaine, I wanted to ask you because we're talking about all of these different risks that potentially are on the horizon. One of them, which you touched on, is that potentially inflation proofs you know, stickier than people think the other one is that we are misreading the labor market. And I'm wondering what your thought is on that, Like how potentially we might be misreading it.
Yeah, labor has been sticky.
An other words, unemployment has stayed surprisingly low. We had a significant number of cross currents during COVID that took a lot of labor out of the market. But aside from that, we've also had some really big structural changes. We have the baby boomers getting older and getting to that age of retirement.
It's a different cohort.
They're looking at retirement as let's go, you know, get a condo in Florida and play pick a ball and golf.
That sounds really nice. Actually, I would love to be doing that right now.
And they have more means to retire early. I think a lot a lot of people were looking at that as a fluke, the early retirements and people coming out of the labor force through COVID. You know, don't forget how big that baby boomer cohort is. They're going to continue to be coming out of the labor force at a faster pace.
And I think at the at the same time.
Anecdotally locally, what I've noticed is when when we decide we're going to go out to dinner.
Just an example, we decide we're going to go out to dinner, we.
Have to really think about which restaurant is open which day because all of the restaurants in our area are short staffed.
So what they've started to.
Do is closed down for a cup days a week. And it's not just happening there. It's not just happening in the restaurant industry. It's happening that type of thing is happening where you know there is a need or companies would like to give better service, have more employees, but they're just on the employees to hire. I think there's some pent up demand there for labor that will come back in if.
The labor market loosens up.
So I do think if there's anywhere where we might be misreading, is that the pressure on the labor market and potentially wages might stick around a little bit longer.
Well, Elaine Stokes, the new kid on the block, only thirty five years at Loomis Hills. Great to catch up with you. We're almost out of time. We can't let you go yet though, because Lol, Donna's going to tell us the craziest thing she saw in markets this week.
Okay, remember last week I had a kind of lame one about Wendy's the chili and the can or whatever. Okay, this week's is also about Wendy's. I haven't been to Wendy's in years, but Frosty's in the can. No, this is so interesting. Oh that's a really good idea. They should sell that at grocery stores. I would definitely buy
Frosty's ice cream anyway. Wendy's is going to start testing an AI powered chat bot for drive through orders, so you can go to Wendy's, go through the drive through, and potentially be talking to an AI chat bot to take your place your order.
She makes a lot of sense, especially given Elaine's restaurant worker shortage.
Yeah, and isn't that so cool? Like up until now, mostly when we're when any of us have interfaced with AI stuff, it's like you going to chat GPT and iking you to write you a song around and this is like you're out in the real world, You're not looking for AI stuff, and potentially you run into this, you know, chat spot, Yeah exactly. Yeah, hopefully then I'll mess it up.
That's pretty interesting, I thought, so, yeah, all right, that's a good one. How about you, Elaine, see anything crazy this week?
I'm really struggling between my silly one and my serious one. I think my silly one a little bit goes with yours, and it is how new technology is being used in a strange way.
Sea urchins, you know what.
Little sea urchins are not well known fact. They like to put rocks and shells on their heads to keep predators.
In the sun away.
So at an aquarium, some of the workers at the aquarium decided to make them to three D print them hats. You know, there are going to be uses we're not expecting from AI, from three D printing, from all this technology that's happened over probably this last ten years.
I'll say I was not expecting that one.
That's awesome, honestly, that's so good. That's a really good one.
And then my serious one is I don't know if you saw the story about temperatures in Vietnam.
Reaching forty four point one.
Degree celsius that's one hundred and eleven degrees. Thailand tapped out at forty four point six celsius.
That's one hundred and twelve degrees. There is a major heat wave going on.
These are record temperatures. These are temperatures where it doesn't matter if it's dry heat or not. I mean, these are crazy temperatures.
And it just got my mind going.
You know, we have been so focused and so worried about heating Europe in the winter. Now we need to worry about cooling the planet.
Yeah, that's a great point, especially those when those heat waves hit Europe and the air conditioning is in the electricity.
It effects also food supply chains, tourism at.
Such a Yeah, that's true. That is some hot temperatures. Though, all right, I'll give you mine. So Steve Jobs, Uh oh no, I didn't look. I didn't pekin Veldona.
I have my eyes closed.
Steve Jobs famously did not like to give autographs, so which means that in the collector's market his old checks are very much a hot item. Who was he banking with Apple was Wells Fargo? Wow, it's a check from the seventies up for sale on our our auctions. Still six hours left to go for the bidding. Okay, sign checked by Steve Jobs. Elaine, It's time to play the prices precise not.
The price is right.
The price is precise. I'll warn you there are six hours left in the auction as of the time we're recording. But the bidding is pretty close to what his last sign check sold for, so I think we're pretty close in the price discovery, what do you think the going bid is for? Were assigned cashed Steve jobs check.
I'm going first, you go first. One hundred and fifty thousand dollars.
One hundred and fifty thousand dollars. That's a very confident and quick answer.
Thanks.
Thanks Elaine, you know the rules. What do you think the bid is for? Assigned check Apple computer company check signed by Steve Jobs.
I was going to say exactly what you said, so I am gonna take a leap.
Three hundred and thirty three thousand.
Wow. Wow, you guys are big spenders.
Don't tell me it's like ten thousand.
Currently I had fifty three thousand.
Oh that's so much.
The well come in my experience with these things is someone comes in with a high bid at the end. Last year's was fifty five thousand for a.
Piece of paper. Hop that doesn't mean anything.
Hop on there and bid away. Beldada, you got success.
Oh my gosh, these bidders would love to have me. I just overbid on every.
Show Tier one hundred and fifty thousand.
Yeah wow, not that you much?
And maybe it is alone? All right? Now you got me thinking maybe maybe I should bet on it. It seems underpriced. Wildna Kaipar fifty three thousand dollars.
Yeah, let me just spend more with you, all right?
Thank you.
You're welcome.
With that, said Elaine Stokes of Bluma, seals great to catch up with you. Really appreciate you allowing us to pick your brain on the markets.
Had a good time, great, Thank you.
Thank you so much, Elaine. What Goes Up We'll be back next week. Until then, you can find us on the Bloomberg Terminal website and app, or wherever you get your podcasts. We'd love it if you took the time to rate and review the show so more listeners can find us. You can find us on Twitter, follow me at Wildona Hirik. Mike Reagan is at Reaganonymous. You can also follow Bloomber Podcasts at podcasts. What Goes Up is produced by Stacey wom and our head of podcas cast
is Stage Problem. Thanks for listening. We'll see you next week.